Abu Dhabi’s residential rents may drop by 10 percent in the next 12 months, extending a three-year decline, as rising home completions increases the amount of unoccupied properties, according to the emirate’s second-largest real-estate developer.
“The supply is coming very fast because whatever was started three or four years ago is beginning to come into the market,” Gurjit Singh, chief operating officer of Sorouh Real Estate PJSC, said in an interview in Abu Dhabi. That “will bring down rents quite rapidly.”
Abu Dhabi’s construction boom was hurt by the financial crisis at a much earlier stage than that of neighboring Dubai, which by mid-2008 had completed more projects and attracted more buyers. Since then, Abu Dhabi’s decline has been slower than Dubai, the worst performing market in the Middle East.
Rents in Abu Dhabi have fallen 40 percent since the market’s peak, Jones Lang LaSalle estimates. Those in Dubai have dropped 55 percent, according to Deutsche Bank AG.
“Two years ago, we were still seeing rents going up here because at that time there was a dearth of quality supply, while Dubai’s rents were coming down,” Singh said.
About 50,000 homes, 27 percent of Abu Dhabi’s current supply, will be completed by 2014 and about 16,000 will be ready this year, said Craig Plumb, Jones Lang’s head of Middle East research.
Developers may need to reduce rents by more than 10 percent to attract tenants, Plumb said. A surfeit of homes in Dubai caused rents to drop by more than half there and provided an alternative to commuters who live in Dubai and work in Abu Dhabi, he said.
Abu Dhabi opened its property market to foreign buyers in 2005, three years after Dubai. The recession’s full affect on the emirate’s property market lagged almost two years behind Dubai, where home prices and rents slumped after the bankruptcy of Lehman Brothers International Inc in September 2008.
Sorouh expects to hand over the keys to 7,000 homes over the next four years, Chief Financial Officer Richard Amos said on April 17. That excludes homes the developer is building for a UAE government housing programme.
Sorouh will probably collect Dh3.2 billion ($870 million) from property buyers and commercial and residential tenants this year and will spend Dh3 billion on project completions, he said. The company has Dh2.35 billion of debt due in 2014, data compiled by Bloomberg show.
Apart from completing construction and collecting final payments that typically amounts to 50 percent of the property’s value, Sorouh has been working to increase income from rents of offices, homes and shops. It’s aiming to triple its rental income over the next three to five years from Dh171 million in the first-quarter, Singh said.
The completion of 1,537 homes in the company’s Alrayyana development by the end of this year and the leasing of 150,000 square-feet of retail space in the Sun & Sky towers will help drive growth. UK supermarket chain Waitrose, a unit of John Lewis Partnership Plc, will open a store in the tower later this year, Singh said.
Abu Dhabi’s market will probably need three years to absorb the homes that are now being built, preventing rent and price increases, Singh said. In the meantime, developers should offer tenants long-term leases and try to manage their properties more effectively. That would help them attract investment funds and real estate investment trusts when rents eventually start to rise, he said.
Investment funds and REITs aren’t interested in UAE properties at the moment because “we are still at the early stages of getting out of this market,” Singh said. “The yields still need to improve and the transparency as well as the institutional investment frameworks.”